Edgar Filing: AMERICAN INTERNATIONAL GROUP INC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012

Commission File Number 1-8787

American International Group, Inc.
(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		13-2592361 (I.R.S. Employer Identification No.)
180 Maiden Lane, New York, New York (Address of principal executive offices)		10038 (Zip Code)

Registrant's telephone number, including area code: (212) 770-7000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.


Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of July 31, 2012, there were 1,728,479,651 shares outstanding of the registrant's common stock.

American International Group, Inc.

Table of Contents

Description		Page Number



PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Note 1. Basis of Presentation and Significant Events	8
	Note 2. Summary of Significant Accounting Policies	10
	Note 3. Segment Information	15
	Note 4. Fair Value Measurements	18
	Note 5. Investments	37
	Note 6. Lending Activities	44
	Note 7. Variable Interest Entities	45
	Note 8. Derivatives and Hedge Accounting	46
	Note 9. Commitments, Contingencies and Guarantees	52
	Note 10. Total Equity and Earnings (Loss) Per Share	67
	Note 11. Employee Benefits	74
	Note 12. Income Taxes	75
	Note 13. Discontinued Operations	76
	Note 14. Information Provided in Connection with Outstanding Debt	77
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	85
	Cautionary Statement Regarding Forward-Looking Information	85
	Use of Non-GAAP Measures	86
	Executive Overview	86
	Outlook	89
	Results of Operations	99
	Consolidated Results	99
	Segment Results	104
	Chartis Operations	106
	Liability for Unpaid Claims and Claims Adjustment Expense	117
	SunAmerica Operations	124
	Aircraft Leasing Operations	130
	Other Operations	132
	Consolidated Comprehensive Income (Loss)	138
	Capital Resources and Liquidity	140
	Overview	140
	Liquidity Adequacy Management	141
	Analysis of Sources and Uses of Cash	142
	Liquidity of Parent and Subsidiaries	143
	Credit Facilities	149
	Contingent Liquidity Facilities	150
	Contractual Obligations	151
	Off-Balance Sheet Arrangements and Commercial Commitments	151
	Debt	152
	Credit Ratings	155
	Investments	156
	Investment Strategies	156
	Investment Highlights	156
	Impairments	166
	Enterprise Risk Management	171
	Overview	171
	Credit Risk Management	171
	Market Risk Management	177
	Critical Accounting Estimates	178
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	184
Item 4.	Controls and Procedures	184
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	185
Item 1A.	Risk Factors	185
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	186
Item 4.	Mine Safety Disclosures	186
Item 6.	Exhibits	186
Signatures		187

2 AIG 2012 Form 10-Q

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American International Group, Inc.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheet (unaudited)

(in millions, except for share data)	June 30, 2012			December 31, 2011



Assets:
Investments:
Fixed maturity securities:
Bonds available for sale, at fair value (amortized cost: 2012 – $244,790; 2011 – $250,770)	$	263,014		$	263,981
Bond trading securities, at fair value		30,919			24,364
Equity securities:
Common and preferred stock available for sale, at fair value (cost: 2012 – $1,733; 2011 – $1,820)		2,947			3,624
Common and preferred stock trading, at fair value		103			125
Mortgage and other loans receivable, net of allowance (portion measured at fair value: 2012 – $123; 2011 – $107)		19,387			19,489
Flight equipment primarily under operating leases, net of accumulated depreciation		35,095			35,539
Other invested assets (portion measured at fair value: 2012 – $16,415; 2011 – $20,876)		36,700			40,744
Short-term investments (portion measured at fair value: 2012 – $7,359; 2011 – $5,913)		24,365			22,572

Total investments		412,530			410,438
Cash		1,232			1,474
Accrued investment income		3,029			3,108
Premiums and other receivables, net of allowance		14,550			14,721
Reinsurance assets, net of allowance		27,539			27,211
Current and deferred income taxes		16,195			17,802
Deferred policy acquisition costs		8,565			8,937
Derivative assets, at fair value		3,753			4,499
Other assets, including restricted cash of $3,253 in 2012 and $2,988 in 2011 (portion measured at fair value: 2012 – $700; 2011 – $0)		13,725			12,782
Separate account assets, at fair value		54,265			51,388

Total assets	$	555,383		$	552,360

Liabilities:
Liability for unpaid claims and claims adjustment expense	$	87,871		$	91,145
Unearned premiums		24,458			23,465
Future policy benefits for life and accident and health insurance contracts		34,935			34,317
Policyholder contract deposits (portion measured at fair value: 2012 – $1,188; 2011 – $918)		126,954			126,898
Other policyholder funds		6,231			6,691
Derivative liabilities, at fair value		4,138			4,733
Other liabilities (portion measured at fair value: 2012 – $1,588; 2011 – $907)		36,993			27,554
Long-term debt (portion measured at fair value: 2012 – $9,404; 2011 – $10,766)		73,897			75,253
Separate account liabilities		54,265			51,388

Total liabilities		449,742			441,444

Commitments, contingencies and guarantees (see Note 9)
Redeemable noncontrolling interests (see Note 1):
Nonvoting, callable, junior preferred interests held by Department of the Treasury		-			8,427
Other		112			96

Total redeemable noncontrolling interests		112			8,523

AIG shareholders' equity:
Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2012 – 1,906,612,666 and 2011 – 1,906,568,099		4,766			4,766
Treasury stock, at cost; 2012 – 178,142,848; 2011 – 9,746,617 shares of common stock		(5,926	)		(942	)
Additional paid-in capital		81,764			81,787
Retained earnings		16,314			10,774
Accumulated other comprehensive income		7,791			5,153

Total AIG shareholders' equity		104,709			101,538
Non-redeemable noncontrolling interests		820			855

Total equity		105,529			102,393

Total liabilities and equity	$	555,383		$	552,360

See accompanying Notes to Consolidated Financial Statements, which include a summary of revisions to prior year balances in connection with a change in accounting principle.

AIG 2012 Form 10-Q 3

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American International Group, Inc.

Consolidated Statement of Operations (unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,


(dollars in millions, except per share data)	2012			2011			2012			2011

Revenues:
Premiums	$	9,619		$	9,898		$	19,080		$	19,380
Policy fees		674			682			1,365			1,366
Net investment income		4,481			4,464			11,586			10,033
Net realized capital gains (losses):
Total other-than-temporary impairments on available for sale securities		(99	)		(181	)		(267	)		(399	)
Portion of other-than-temporary impairments on available for sale fixed maturity securities recognized in Other comprehensive income		(51	)		56			(336	)		59

Net other-than-temporary impairments on available for sale securities recognized in net income		(150	)		(125	)		(603	)		(340	)
Other realized capital gains (losses)		547			200			750			(320	)

Total net realized capital gains (losses)		397			75			147			(660	)
Aircraft leasing revenue		1,123			1,134			2,279			2,290
Other income		829			427			1,109			1,710

Total revenues		17,123			16,680			35,566			34,119

Benefits, claims and expenses:
Policyholder benefits and claims incurred		7,769			8,086			14,871			17,045
Interest credited to policyholder account balances		1,064			1,114			2,133			2,220
Amortization of deferred acquisition costs		1,472			1,322			2,819			2,553
Other acquisition and insurance expenses		2,264			2,129			4,522			4,097
Interest expense		954			1,001			1,907			2,085
Aircraft leasing expenses		646			578			1,271			1,207
Net loss on extinguishment of debt		11			79			32			3,392
Other expenses		1,192			577			1,676			1,036

Total benefits, claims and expenses		15,372			14,886			29,231			33,635

Income from continuing operations before income tax expense (benefit)		1,751			1,794			6,335			484

Income tax expense (benefit)		(593	)		(296	)		555			(522	)

Income from continuing operations		2,344			2,090			5,780			1,006
Income (loss) from discontinued operations, net of income tax expense (benefit)		(5	)		(37	)		8			2,548

Net income		2,339			2,053			5,788			3,554

Less:
Net income from continuing operations attributable to noncontrolling interests:
Nonvoting, callable, junior and senior preferred interests		-			141			208			393
Other		7			64			40			9

Total net income from continuing operations attributable to noncontrolling interests		7			205			248			402
Net income from discontinued operations attributable to noncontrolling interests		-			12			-			19

Total net income attributable to noncontrolling interests		7			217			248			421

Net income attributable to AIG	$	2,332		$	1,836		$	5,540		$	3,133

Net income attributable to AIG common shareholders	$	2,332		$	1,836		$	5,540		$	2,321

Income per common share attributable to AIG common shareholders:
Basic:
Income (loss) from continuing operations	$	1.33		$	1.03		$	3.05		$	(0.12	)
Income (loss) from discontinued operations	$	-		$	(0.03	)	$	-		$	1.49
Diluted:
Income (loss) from continuing operations	$	1.33		$	1.03		$	3.05		$	(0.12	)
Income (loss) from discontinued operations	$	-		$	(0.03	)	$	-		$	1.49

Weighted average shares outstanding:
Basic		1,756,689,067			1,836,713,069			1,816,331,019			1,698,001,301
Diluted		1,756,714,475			1,836,771,513			1,816,358,625			1,698,001,301

See accompanying Notes to Consolidated Financial Statements, which include a summary of revisions to prior year balances in connection with a change in accounting principle.

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American International Group, Inc.

Consolidated Statement of Comprehensive Income (unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,


(in millions)	2012			2011			2012			2011

Net income	$	2,339		$	2,053		$	5,788		$	3,554

Other comprehensive income, net of tax
Change in unrealized appreciation (depreciation) of fixed maturity investments on which other-than-temporary credit impairments were taken		17			(107	)		630			289
Change in unrealized appreciation of all other investments		1,305			1,861			2,286			1,054
Change in foreign currency translation adjustments		(427	)		288			(336	)		(229	)
Change in net derivative gains arising from cash flow hedging activities		1			58			23			71
Change in retirement plan liabilities adjustment		14			14			32			149

Other comprehensive income		910			2,114			2,635			1,334

Comprehensive income		3,249			4,167			8,423			4,888
Comprehensive income attributable to noncontrolling nonvoting, callable, junior and senior preferred interests		-			141			208			393
Comprehensive income (loss) attributable to other noncontrolling interests		(1	)		(7	)		37			(19	)

Total comprehensive income (loss) attributable to noncontrolling interests		(1	)		134			245			374

Comprehensive income attributable to AIG	$	3,250		$	4,033		$	8,178		$	4,514

See accompanying Notes to Consolidated Financial Statements, which include a summary of revisions to prior year balances in connection with a change in accounting principle.

AIG 2012 Form 10-Q 5

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American International Group, Inc.

Consolidated Statement of Cash Flows (unaudited)

Six Months Ended June 30, (in millions)	2012			2011



Cash flows from operating activities:
Net income	$	5,788		$	3,554
Income from discontinued operations		(8	)		(2,548	)

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Noncash revenues, expenses, gains and losses included in income:
Net gains on sales of securities available for sale and other assets		(1,817	)		(539	)
Net losses on extinguishment of debt		32			3,392
Unrealized gains in earnings – net		(4,088	)		(2,473	)
Equity in income from equity method investments, net of dividends or distributions		(395	)		(795	)
Depreciation and other amortization		3,574			3,585
Impairments of assets		1,085			889
Changes in operating assets and liabilities:
General and life insurance reserves		(639	)		5,604
Premiums and other receivables and payables – net		495			49
Reinsurance assets and funds held under reinsurance treaties		(365	)		(5,559	)
Capitalization of deferred policy acquisition costs		(2,863	)		(2,661	)
Current and deferred income taxes – net		349			(1,068	)
Payment of FRBNY Credit Facility accrued compounded interest and fees		-			(6,363	)
Other, net		484			(1,279	)

Total adjustments		(4,148	)		(7,218	)

Net cash provided by (used in) operating activities – continuing operations		1,632			(6,212	)
Net cash provided by operating activities – discontinued operations		-			2,675

Net cash provided by (used in) operating activities		1,632			(3,537	)

Cash flows from investing activities:
Proceeds from (payments for)
Sales of available for sale and hybrid investments		22,028			23,668
Maturities of fixed maturity securities available for sale and hybrid investments		10,805			9,846
Sales of trading securities		4,968			7,621
Sales or distributions of other invested assets (including flight equipment)		7,790			4,961
Sales of divested businesses, net		-			587
Principal payments received on and sales of mortgage and other loans receivable		1,384			1,706
Purchases of available for sale and hybrid investments		(28,993	)		(48,485	)
Purchases of trading securities		(2,394	)		(688	)
Purchases of other invested assets (including flight equipment)		(2,959	)		(3,260	)
Mortgage and other loans receivable issued and purchased		(1,402	)		(1,026	)
Net change in restricted cash		(265	)		26,480
Net change in short-term investments		(211	)		12,967
Net change in derivative assets and liabilities		278			390
Other, net		(158	)		33

Net cash provided by investing activities – continuing operations		10,871			34,800
Net cash provided by investing activities – discontinued operations		-			3,021

Net cash provided by investing activities		10,871			37,821

Cash flows from financing activities:
Proceeds from (payments for)
Policyholder contract deposits		6,809			9,530
Policyholder contract withdrawals		(7,077	)		(7,769	)
FRBNY credit facility repayments		-			(14,622	)
Issuance of long-term debt		6,776			3,021
Repayments of long-term debt		(8,155	)		(9,968	)
Proceeds from drawdown on the Department of the Treasury Commitment		-			20,292
Repayment of Department of the Treasury SPV Preferred Interests		(8,636	)		(9,146	)
Repayment of FRBNY SPV Preferred Interests		-			(26,432	)
Issuance of Common Stock		-			4,332
Purchase of Common Stock		(5,000	)		-
Acquisition of noncontrolling interest		(100	)		(647	)
Other, net		2,662			(373	)

Net cash used in financing activities – continuing operations		(12,721	)		(31,782	)
Net cash used in financing activities – discontinued operations		-			(1,932	)

Net cash used in financing activities		(12,721	)		(33,714	)

Effect of exchange rate changes on cash		(24	)		29

Net increase (decrease) in cash		(242	)		599
Cash at beginning of period		1,474			1,558
Change in cash of businesses held for sale		-			433

Cash at end of period	$	1,232		$	2,590

See accompanying Notes to Consolidated Financial Statements, which include a summary of revisions to prior year balances in connection with a change in accounting principle.

6 AIG 2012 Form 10-Q

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American International Group, Inc.

Consolidated Statement of Equity (unaudited)

(in millions)	Preferred Stock			Common Stock			Treasury Stock			Additional Paid-in Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income			Total AIG Share- holders' Equity			Non redeemable non- controlling Interests			Total Equity



Six Months Ended June 30, 2012
Balance, beginning of year	$	-		$	4,766		$	(942	)	$	81,787		$	10,774		$	5,153		$	101,538		$	855		$	102,393

Common stock issued under stock plans								16			(15	)		-			-			1			-			1
Purchase of common stock		-			-			(5,000	)		-			-			-			(5,000	)		-			(5,000	)
Net income attributable to AIG or other noncontrolling interests*		-			-			-			-			5,540			-			5,540			43			5,583
Other comprehensive income (loss)		-			-			-			-			-			2,638			2,638			(3	)		2,635
Deferred income taxes		-			-			-			(8	)		-			-			(8	)		-			(8	)
Contributions from noncontrolling interests		-			-			-			-			-			-			-			46			46
Distributions to noncontrolling interests		-			-			-			-			-			-			-			(100	)		(100	)
Other		-			-			-			-			-			-			-			(21	)		(21	)

Balance, end of period	$	-		$	4,766		$	(5,926	)	$	81,764		$	16,314		$	7,791		$	104,709		$	820		$	105,529

Six Months Ended June 30, 2011
Balance, beginning of year	$	71,983		$	368		$	(873	)	$	9,683		$	(3,466	)	$	7,624		$	85,319		$	27,920		$	113,239

Cumulative effect of change in accounting principle, net of tax		-			-			-			-			(6,382	)		(81	)		(6,463	)		-			(6,463	)
Series F drawdown		20,292			-			-			-			-			-			20,292			-			20,292
Repurchase of SPV preferred interests in connection with Recapitalization		-			-			-			-			-			-			-			(26,432	)		(26,432	)
Exchange of consideration for preferred stock in connection with Recapitalization		(92,275	)		4,138			-			67,460			-			-			(20,677	)		-			(20,677	)
Common stock issued		-			250			-			2,636			-			-			2,886			-			2,886
Settlement of equity unit stock purchase contract		-			6			-			1,440			-			-			1,446			-			1,446
Net income attributable to AIG or other noncontrolling interests*		-			-			-			-			3,133			-			3,133			22			3,155
Net income attributable to noncontrolling nonvoting, callable, junior and senior preferred interests		-			-			-			-			-			-			-			74			74
Other comprehensive income (loss)		-			-			-			-			-			1,381			1,381			(47	)		1,334
Acquisition of noncontrolling interest		-			-			-			(157	)		-			88			(69	)		(468	)		(537	)
Net decrease due to deconsolidation		-			-			-			-			-			-			-			(6	)		(6	)
Contributions from noncontrolling interests		-			-			-			-			-			-			-			42			42
Distributions to noncontrolling interests		-			-			-			-			-			-			-			(116	)		(116	)
Other		-			(1	)		1			(6	)		(1	)		-			(7	)		(41	)		(48	)

Balance, end of period	$	-		$	4,761		$	(872	)	$	81,056		$	(6,716	)	$	9,012		$	87,241		$	948		$	88,189

*: Excludes gains of $205 million and $325 million for the six months ended June 30, 2012 and 2011, respectively, attributable to redeemable noncontrolling interests. See Note 10.

See accompanying Notes to Consolidated Financial Statements, which include a summary of revisions to prior year balances in connection with a change in accounting principle.

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. BASIS OF PRESENTATION AND SIGNIFICANT EVENTS

These unaudited condensed consolidated financial statements do not include all disclosures that are normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) and should be read in conjunction with the audited consolidated financial statements and the related notes included in the Annual Report on Form 10-K of American International Group, Inc. (AIG) for the year ended December 31, 2011, as amended by Amendment No. 1 and Amendment No. 2 on Form 10-K/A filed on February 27, 2012 and March 30, 2012, respectively, and as updated by AIG's Current Report on Form 8-K filed on May 4, 2012 (collectively, the 2011 Annual Report). The condensed consolidated financial information as of December 31, 2011 included herein has been derived from audited consolidated financial statements in the 2011 Annual Report not included herein.

Certain of AIG's foreign subsidiaries included in the consolidated financial statements report on different fiscal-period bases. The effect on AIG's consolidated financial condition and results of operations of all material events occurring at these subsidiaries through the date of each of the periods presented in these financial statements has been recorded.

In the opinion of management, these consolidated financial statements contain the normal recurring adjustments necessary for a fair statement of the results presented herein. Interim period operating results may not be indicative of the operating results for a full year. AIG evaluated the need to recognize or disclose events that occurred subsequent to June 30, 2012 and prior to the issuance of these unaudited condensed consolidated financial statements. All material intercompany accounts and transactions have been eliminated.

REVISIONS TO PRIOR YEAR FINANCIAL STATEMENTS

During the quarter ended March 31, 2012, AIG retroactively adopted a standard that changed its method of accounting for costs associated with acquiring or renewing insurance contracts. See Note 2 herein for additional details, including a summary of revisions to prior year financial statements.

To align the presentation of Changes in fair value of derivatives with changes in the administration of AIG's derivatives portfolio, changes were made to the presentation within the Consolidated Statement of Operations and Consolidated Statement of Cash Flows for activity where Global Capital Markets executes transactions with third parties on behalf of AIG subsidiaries. Specifically, derivative activity where AIGFP is an intermediary for AIG subsidiaries, which historically has been reported in Other income, has been reclassified to Net realized capital gains (losses). Additionally, certain other items have been reclassified within the Consolidated Statement of Operations in the current period. Prior period amounts were reclassified to conform to the current period presentation.

USE OF ESTIMATES

The preparation of financial statements requires the application of accounting policies that often involve a significant degree of judgment. AIG considers its accounting policies that are most dependent on the application of estimates and assumptions to be those relating to items considered by management in the determination of:

•: estimates with respect to income taxes, including the recoverability of deferred tax assets and the predictability of future tax planning strategies and operating profitability of the character necessary for their realization;
•: recoverability of assets, including deferred policy acquisition costs (DAC), flight equipment, and reinsurance;
•: insurance liabilities, including general insurance unpaid claims and claims adjustment expenses and future policy benefits for life and accident and health contracts;
•: estimated gross profits for investment-oriented products;

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

•: impairment charges, including other-than-temporary impairments on financial instruments and goodwill impairments;
•: liabilities for legal contingencies; and
•: fair value measurements of certain financial assets and liabilities, including credit default swaps (CDS).

These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, AIG's consolidated financial condition, results of operations and cash flows could be materially affected.

SIGNIFICANT EVENTS

During the six months ended June 30, 2012, AIG executed significant transactions in the debt and equity capital markets as described below.

Common Stock Offerings by the Department of the Treasury and AIG Purchases of Shares

The United States Department of the Treasury (Department of the Treasury), as selling shareholder, completed registered public offerings of AIG common stock, par value $2.50 per share (AIG Common Stock) on March 13, 2012 (the March Offering) and May 10, 2012 (the May Offering).

In the March Offering, the Department of the Treasury sold approximately 207 million shares of AIG Common Stock for aggregate proceeds of approximately $6.0 billion. AIG purchased approximately 103 million shares of AIG Common Stock in the March Offering at the initial public offering price of $29.00 per share for an aggregate purchase amount of approximately $3.0 billion.

In the May Offering, the Department of the Treasury sold approximately 189 million shares of AIG Common Stock for aggregate proceeds of approximately $5.7 billion. AIG purchased approximately 66 million shares of AIG Common Stock in the May Offering at the initial public offering price of $30.50 per share for an aggregate purchase amount of approximately $2.0 billion.

As a result of the Department of the Treasury's sale of AIG Common Stock and AIG's purchase of shares in these offerings, ownership by the Department of the Treasury was reduced from approximately 77 percent to approximately 61 percent of the AIG Common Stock outstanding after the completion of the May Offering.

Sale of AIA Shares

On March 7, 2012, AIG sold approximately 1.72 billion ordinary shares of AIA Group Limited (AIA) for gross proceeds of approximately $6.0 billion (the AIA Sale). As a result of the AIA Sale, AIG's retained interest in AIA decreased from approximately 33 percent to approximately 19 percent. At June 30, 2012 and December 31, 2011, the fair value of AIG's retained interest in AIA was approximately $7.7 billion and $12.4 billion, respectively.

Senior Notes Offerings

AIG completed the following registered notes offerings:

•: On March 22, 2012, $750 million principal amount of 3.000% Notes Due 2015 and $1.25 billion principal amount of 3.800% Notes Due 2017 for the Matched Investment Program (MIP).
•: On May 24, 2012, $750 million principal amount of 4.875% Notes Due 2022, and on June 29, 2012, an additional $750 million principal amount of such 4.875% Notes Due 2022.

AIG 2012 Form 10-Q 9

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

ILFC Debt Offerings

In the first six months of 2012, International Lease Finance Corporation (ILFC) raised approximately $3.2 billion through a combination of secured and unsecured financings.

Pay Down of Department of the Treasury's AIA SPV Preferred Interests in Full

On March 7, 2012, AIG entered into an agreement with the Department of the Treasury to amend various agreements (the Amendment), which enabled the special purpose vehicle that held AIG's remaining shares in AIA (the AIA SPV) to retain and distribute to AIG the net proceeds in excess of $5.6 billion received by the AIA SPV from the AIA Sale. In addition, the liens created by the agreements on (i) the equity interests in ILFC, (ii) the ordinary shares of AIA held by the AIA SPV subsequent to the closing of the AIA Sale and (iii) the common equity interests in the AIA SPV were released and such interests and AIA ordinary shares no longer constituted collateral securing the repayment of the liquidation preference of the Department of the Treasury's preferred interests in the AIA SPV (the AIA SPV Preferred Interests). The Amendment also required the AIA SPV and AM Holdings LLC (the ALICO SPV) to redeem their preferred participating return rights held in such SPVs by the Department of the Treasury before the release of the collateral. AIG contributed a portion of the net proceeds received by AIG in respect of its interest in Maiden Lane II LLC (ML II) to redeem these residual rights.

On March 21, 2012, AIG entered into an agreement with the Department of the Treasury, pursuant to which the AIA SPV paid down in full the remaining liquidation preference of the AIA SPV Preferred Interests. As a result of the payment, the remaining liens on AIG assets supporting the paydown of these interests were released.

SUPPLEMENTARY DISCLOSURE OF CONSOLIDATED CASH FLOW INFORMATION

Six Months Ended June 30, (in millions)	2012		2011



Cash paid during the period for:
Interest*	$	2,088	$	7,081
Taxes	$	206	$	547
Non-cash financing/investing activities:
Interest credited to policyholder contract deposits included in financing activities	$	2,186	$	2,434

*: 2011 includes payment of accrued compounded interest of $4.7 billion under the Credit Agreement, dated as of September 22, 2008, as amended (the FRBNY Credit Facility), before the facility was terminated on January 14, 2011 in connection with the series of integrated transactions to recapitalize AIG (the Recapitalization) with the Department of the Treasury, the Federal Reserve Bank of New York and the AIG Credit Facility Trust, including the repayment of all amounts owed under the FRBNY Credit Facility.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

RECENT ACCOUNTING STANDARDS

Future Application of Accounting Standards

In July 2012, the Financial Accounting Standards Board (FASB) issued an accounting standard that allows a company the option to first assess qualitatively whether it is more likely than not that an indefinite-lived intangible asset is impaired, therefore necessitating that it perform a quantitative impairment test. A company is not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the company determines it is more likely than not the asset is impaired.

10 AIG 2012 Form 10-Q

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. A company can choose to early adopt the standard. AIG does not expect adoption of the standard to have a material effect on its consolidated financial condition, results of operations or cash flows.

Accounting Standards Adopted During 2012

AIG adopted the following accounting standards on January 1, 2012:

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

In October 2010, the FASB issued an accounting standard update that amends the accounting for costs incurred by insurance companies that can be capitalized in connection with acquiring or renewing insurance contracts. The standard clarifies how to determine whether the costs incurred in connection with the acquisition of new or renewal insurance contracts qualify as deferred policy acquisition costs. AIG adopted the standard retrospectively on January 1, 2012.

Policy acquisition costs represent those costs that are incremental and directly related to the successful acquisition of new or renewal insurance contracts. AIG defers incremental costs that result directly from, and are essential to, the acquisition or renewal of an insurance contract. Such costs generally include agent or broker commissions and bonuses, premium taxes, and medical and inspection fees that would not have been incurred if the insurance contract had not been acquired or renewed. Each cost is analyzed to assess whether it is fully deferrable. AIG partially defers costs, including certain commissions, when it does not believe the entire cost is directly related to the acquisition or renewal of insurance contracts.

AIG also defers a portion of employee total compensation and payroll-related fringe benefits directly related to time spent performing specific acquisition or renewal activities including costs associated with the time spent on underwriting, policy issuance and processing, and sales force contract selling. The amounts deferred are derived based on successful efforts for each distribution channel and/or cost center from which the cost originates.

Advertising costs related to the issuance of insurance contracts that meet the direct-advertising criteria are deferred and amortized as part of deferred policy acquisition costs.

The method AIG uses to amortize deferred policy acquisition costs for either short- or long-duration insurance contracts did not change as a result of the adoption of the standard.

The adoption of the standard resulted in a reduction to beginning of period retained earnings for the earliest period presented and a decrease in the amount of capitalized costs in connection with the acquisition or renewal of insurance contracts. Accordingly, AIG revised its historical financial statements and accompanying notes to the consolidated financial statements for the changes in deferred policy acquisition costs and associated changes in acquisition expenses and income taxes for affected entities and segments, including divested entities presented in continuing and discontinued operations.

AIG 2012 Form 10-Q 11

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The following tables present amounts previously reported in 2011, the effect of the change due to the retrospective adoption of the standard, and the adjusted amounts that are reflected in AIG's consolidated financial statements.

December 31, 2011 (in millions)	As Previously Reported		Effect of Change			As Currently Reported



Balance Sheet:
Current and deferred income taxes	$	16,084	$	1,718		$	17,802
Deferred policy acquisition costs		14,026		(5,089	)		8,937
Other assets		12,824		(42	)		12,782

Total assets		555,773		(3,413	)		552,360

Retained earnings		14,332		(3,558	)		10,774
Accumulated other comprehensive income		5,008		145			5,153

Total AIG shareholders' equity		104,951		(3,413	)		101,538

Three Months Ended June 30, 2011 (dollars in millions, except per share data)	As Previously Reported			Effect of Change			As Currently Reported



Statement of Operations:
Total net realized capital gains^(a)	$	71		$	4		$	75

Total revenues		16,676			4			16,680

Interest credited to policyholder account balances		1,110			4			1,114
Amortization of deferred acquisition costs		1,786			(464	)		1,322
Other acquisition and other insurance expenses		1,653			476			2,129

Total benefits, claims and expenses		14,870			16			14,886

Income (loss) from continuing operations before income tax benefit		1,806			(12	)		1,794

Income tax benefit^(b)		(288	)		(8	)		(296	)

Income (loss) from continuing operations		2,094			(4	)		2,090
Income (loss) from discontinued operations, net of income tax expense^(c)		(37	)		-			(37	)

Net income		2,057			(4	)		2,053

Net income attributable to AIG		1,840			(4	)		1,836

Net income (loss) attributable to AIG common shareholders		1,840			(4	)		1,836

Income (loss) per share attributable to AIG common shareholders:
Basic:
Income (loss) from continuing operations	$	1.03		$	-		$	1.03
Income (loss) from discontinued operations	$	(0.03	)	$	-		$	(0.03	)
Diluted
Income (loss) from continuing operations	$	1.03		$	-		$	1.03
Income (loss) from discontinued operations	$	(0.03	)	$	-		$	(0.03	)

12 AIG 2012 Form 10-Q

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Six Months Ended June 30, 2011 (dollars in millions, except per share data)	As Previously Reported			Effect of Change			As Currently Reported



Statement of Operations:
Total net realized capital losses^(a)	$	(667	)	$	7		$	(660	)

Total revenues		34,112			7			34,119

Interest credited to policyholder account balances		2,215			5			2,220
Amortization of deferred acquisition costs		3,502			(949	)		2,553
Other acquisition and other insurance expenses		3,204			893			4,097

Total benefits, claims and expenses		33,686			(51	)		33,635

Income (loss) from continuing operations before income tax benefit		426			58			484

Income tax benefit^(b)		(488	)		(34	)		(522	)

Income (loss) from continuing operations		914			92			1,006
Income (loss) from discontinued operations, net of income tax expense^(c)		1,616			932			2,548

Net income		2,530			1,024			3,554

Net income attributable to AIG		2,109			1,024			3,133

Net income (loss) attributable to AIG common shareholders		1,297			1,024			2,321

Income (loss) per share attributable to AIG common shareholders:
Basic:
Income (loss) from continuing operations	$	(0.18	)	$	0.06		$	(0.12	)
Income from discontinued operations	$	0.94		$	0.55		$	1.49
Diluted
Income (loss) from continuing operations	$	(0.18	)	$	0.06		$	(0.12	)
Income from discontinued operations	$	0.94		$	0.55		$	1.49

(a): Includes $5 million and $(82) million for the three and six months ended June 30, 2011, respectively, attributable to the effect of the reclassification of certain derivative activity discussed in Note 1 herein.
(b): Includes a change in the deferred tax asset valuation allowance for the period.
(c): Represents the results of Nan Shan Life Insurance Company, Ltd. (Nan Shan) and the results of AIG Star Life Insurance Co. Ltd. (AIG Star) and AIG Edison Life Insurance Company (AIG Edison) through the date of their disposition, and the gain on the sale of AIG Star and AIG Edison, which were sold in the first quarter of 2011.

AIG 2012 Form 10-Q 13

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Adoption of the standard did not affect the previously reported totals for net cash flows provided by (used in) operating, investing, or financing activities, but did affect the following components of net cash flows provided by (used in) operating activities.

Six Months Ended June 30, 2011 (in millions)	As Previously Reported			Effect of Change			As Currently Reported



Cash flows from operating activities:
Net income	$	2,530		$	1,024		$	3,554
Income from discontinued operations		(1,616	)		(932	)		(2,548	)

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Noncash revenues, expenses, gains and losses included in income (loss):
Unrealized gains in earnings – net*		(2,466	)		(7	)		(2,473	)
Depreciation and other amortization		4,529			(944	)		3,585
Changes in operating assets and liabilities:
Capitalization of deferred policy acquisition costs		(3,554	)		893			(2,661	)
Current and deferred income taxes – net		(1,034	)		(34	)		(1,068	)
Total adjustments		(7,126	)		(92	)		(7,218	)

*: Includes $73 million for the six months ended June 30, 2011 attributable to the effect of the reclassification of certain derivative activity discussed in Note 1 herein.

For short-duration insurance contracts, starting in 2012, AIG elected to include anticipated investment income in its determination of whether the deferred policy acquisition costs are recoverable. AIG believes the inclusion of anticipated investment income in the recoverability analysis is a preferable accounting policy because it includes in the recoverability analysis the fact that there is a timing difference between when the premiums are collected and in turn invested and when the losses and related expenses are paid. This is considered a change in accounting principle that required retrospective application to all periods presented. Because AIG historically has not recorded any premium deficiency on its short-duration insurance contracts even without the inclusion of anticipated investment income, there were no changes to the historical financial statements for the change in accounting principle.

Reconsideration of Effective Control for Repurchase Agreements

In April 2011, the FASB issued an accounting standard that amends the criteria used to determine effective control for repurchase agreements and other similar arrangements such as securities lending transactions. The standard modifies the criteria for determining when these transactions would be accounted for as secured borrowings (i.e., financings) instead of sales of the securities.

The standard removes from the assessment of effective control the requirement that the transferor have the ability to repurchase or redeem the financial assets on substantially agreed terms, even in the event of default by the transferee. The removal of this requirement makes the level of collateral received by the transferor in a repurchase agreement or similar arrangement irrelevant in determining whether the transaction should be accounted for as a sale. Consequently, more repurchase agreements, securities lending transactions and similar arrangements will be accounted for as secured borrowings.

The guidance in the standard must be applied prospectively to transactions or modifications of existing transactions that occur on or after January 1, 2012. Under this standard, $204 million in repurchase agreements (related to securities with a fair value of $259 million) continued to be accounted for as sales as of June 30, 2012. Any modifications to these transactions that occur subsequent to adoption will result in an assessment of whether they should be accounted for as secured borrowings under the standard. As of June 30, 2012, there were no such modifications subsequent to the adoption of the standard.

14 AIG 2012 Form 10-Q

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Common Fair Value Measurements and Disclosure Requirements in GAAP and IFRS

In May 2011, the FASB issued an accounting standard that amended certain aspects of the fair value measurement guidance in GAAP, primarily to achieve the FASB's objective of a converged definition of fair value and substantially converged measurement and disclosure guidance with International Financial Reporting Standards (IFRS). The measurement and disclosure requirements under GAAP and IFRS are now generally consistent, with certain exceptions including the accounting for day one gains and losses, measuring the fair value of alternative investments using net asset value and certain disclosure requirements.

The standard's fair value measurement and disclosure guidance applies to all companies that measure assets, liabilities, or instruments classified in shareholders' equity at fair value or provide fair value disclosures for items not recorded at fair value. The guidance clarifies existing guidance on the application of fair value measurements, changes certain principles or requirements for measuring fair value, and requires significant additional disclosures for Level 3 valuation inputs. The new disclosure requirements were applied prospectively. The standard became effective for AIG beginning on January 1, 2012. The standard did not have any effect on AIG's consolidated financial condition, results of operations or cash flows. See Note 4 herein.

Presentation of Comprehensive Income

In June 2011, the FASB issued an accounting standard that requires the presentation of comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components, followed consecutively by a second statement that presents total other comprehensive income and its components. The standard became effective beginning January 1, 2012 with retrospective application required. The standard did not have any effect on AIG's consolidated financial condition, results of operations or cash flows.

Testing Goodwill for Impairment

In September 2011, the FASB issued an accounting standard that amends the approach to testing goodwill for impairment. The standard simplifies how entities test goodwill for impairment by permitting an entity to first assess qualitative factors to determine whether it is more likely than not the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative, two-step goodwill impairment test. The standard became effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of the standard did not affect AIG's consolidated financial condition, results of operations or cash flows.

3. SEGMENT INFORMATION

AIG reports the results of its operations through three reportable segments: Chartis, SunAmerica Financial Group (SunAmerica) and Aircraft Leasing. AIG evaluates performance based on pre-tax income (loss), excluding results from discontinued operations, because AIG believes this provides more meaningful information on how its operations are performing.

Effective during the first quarter of 2012, in order to align financial reporting with the manner in which AIG's chief operating decision makers review the Chartis businesses to assess performance and make decisions about resources to be allocated, certain products previously reported in Commercial Insurance were reclassified to Consumer Insurance. These revisions did not affect the total Chartis reportable segment results previously reported.

AIG 2012 Form 10-Q 15

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The following table presents AIG's operations by reportable segment:

	Reportable Segment


	Reportable Segment											Consolidation and Eliminations
(in millions)	Chartis		SunAmerica		Aircraft Leasing*		Other Operations			Total		Consolidation and Eliminations			Consolidated

Three Months Ended June 30, 2012
Total revenues	$	10,020	$	4,213	$	1,121	$	1,869		$	17,223	$	(100	)	$	17,123
Pre-tax income (loss)		961		777		86		(116	)		1,708		43			1,751

Three Months Ended June 30, 2011
Total revenues	$	10,218	$	3,896	$	1,119	$	1,565		$	16,798	$	(118	)	$	16,680
Pre-tax income		826		766		87		87			1,766		28			1,794

Six Months Ended June 30, 2012
Total revenues	$	19,818	$	7,909	$	2,275	$	5,872		$	35,874	$	(308	)	$	35,566
Pre-tax income (loss)		1,871		1,639		206		2,620			6,336		(1	)		6,335

Six Months Ended June 30, 2011
Total revenues	$	20,098	$	7,735	$	2,260	$	4,297		$	34,390	$	(271	)	$	34,119
Pre-tax income (loss)		452		1,733		207		(1,910	)		482		2			484

*: AIG's Aircraft Leasing operations consist of a single operating segment.

The following table presents Chartis operations by operating segment:

(in millions)	Commercial Insurance		Consumer Insurance			Other		Total Chartis



Three Months Ended June 30, 2012
Total revenues	$	6,087	$	3,564		$	369	$	10,020
Pre-tax income		594		192			175		961

Three Months Ended June 30, 2011
Total revenues	$	6,437	$	3,482		$	299	$	10,218
Pre-tax income		629		59			138		826

Six Months Ended June 30, 2012
Total revenues	$	12,016	$	7,176		$	626	$	19,818
Pre-tax income		1,159		426			286		1,871

Six Months Ended June 30, 2011
Total revenues	$	12,503	$	6,916		$	679	$	20,098
Pre-tax income (loss)		245		(196	)		403		452

16 AIG 2012 Form 10-Q

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The following table presents SunAmerica operations by operating segment:

(in millions)	Domestic Life Insurance		Domestic Retirement Services		Total SunAmerica



Three Months Ended June 30, 2012
Total revenues	$	2,484	$	1,729	$	4,213
Pre-tax income		673		104		777

Three Months Ended June 30, 2011
Total revenues	$	2,146	$	1,750	$	3,896
Pre-tax income		369		397		766

Six Months Ended June 30, 2012
Total revenues	$	4,643	$	3,266	$	7,909
Pre-tax income		1,161		478		1,639

Six Months Ended June 30, 2011
Total revenues	$	4,108	$	3,627	$	7,735
Pre-tax income		702		1,031		1,733

The following table presents the components of AIG's Other operations:

(in millions)	Mortgage Guaranty		Global Capital Markets			Direct Investment Book		Retained Interests		Corporate & Other			Consolidation and Eliminations			Total Other Operations



Three Months Ended June 30, 2012
Total revenues	$	224	$	10		$	584	$	813	$	251		$	(13	)	$	1,869
Pre-tax income (loss)		48		(25	)		485		813		(1,435	)		(2	)		(116	)

Three Months Ended June 30, 2011
Total revenues	$	232	$	(105	)	$	136	$	854	$	458		$	(10	)	$	1,565
Pre-tax income (loss)		6		(169	)		73		854		(668	)		(9	)		87

Six Months Ended June 30, 2012
Total revenues	$	424	$	170		$	928	$	3,860	$	513		$	(23	)	$	5,872
Pre-tax income (loss)		56		63			733		3,860		(2,093	)		1			2,620

Six Months Ended June 30, 2011
Total revenues	$	470	$	281		$	599	$	2,503	$	469		$	(25	)	$	4,297
Pre-tax income (loss)		14		121			483		2,503		(5,015	)		(16	)		(1,910	)

AIG 2012 Form 10-Q 17

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

4. FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS ON A RECURRING BASIS

AIG carries certain of its financial instruments at fair value. AIG defines the fair value of a financial instrument as the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See Note 6 to the Consolidated Financial Statements in the 2011 Annual Report for a discussion of AIG's accounting policies and procedures regarding fair value measurements related to the following information.

Assets and liabilities recorded at fair value in the Consolidated Balance Sheet are measured and classified in accordance with a fair value hierarchy established in GAAP. The hierarchy consists of three "levels" based on the observability of inputs available in the marketplace used to measure the fair values as discussed below:

•: Level 1: Fair value measurements that are quoted prices (unadjusted) in active markets that AIG has the ability to access for identical assets or liabilities.
•: Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
•: Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability. Therefore, AIG must make certain assumptions as to the inputs a hypothetical market participant would use to value that asset or liability.

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON A RECURRING BASIS

The following table presents information about assets and liabilities measured at fair value on a recurring basis and indicates the level of the fair value measurement based on the levels of the inputs used:

June 30, 2012 (in millions)	Level 1		Level 2		Level 3		Counterparty Netting^(a)			Cash Collateral^(b)			Total



Assets:
Bonds available for sale:
U.S. government and government sponsored entities	$	19	$	3,998	$	-	$	-		$	-		$	4,017
Obligations of states, municipalities and political subdivisions		-		36,241		1,013		-			-			37,254
Non-U.S. governments		833		24,535		13		-			-			25,381
Corporate debt		-		145,022		1,306		-			-			146,328
RMBS		-		23,170		10,488		-			-			33,658
CMBS		-		4,148		4,643		-			-			8,791
CDO/ABS		-		2,511		5,074		-			-			7,585

Total bonds available for sale		852		239,625		22,537		-			-			263,014

Bond trading securities:
U.S. government and government sponsored entities		800		6,792		-		-			-			7,592
Obligations of states, municipalities and political subdivisions		-		236		-		-			-			236
Non-U.S. governments		-		34		-		-			-			34
Corporate debt		-		1,057		3		-			-			1,060
RMBS		-		1,158		290		-			-			1,448
CMBS		-		1,676		457		-			-			2,133
CDO/ABS		-		3,769		14,647		-			-			18,416

Total bond trading securities		800		14,722		15,397		-			-			30,919

Equity securities available for sale:
Common stock		2,608		2		41		-			-			2,651
Preferred stock		-		46		139		-			-			185
Mutual funds		73		38		-		-			-			111

Total equity securities available for sale		2,681		86		180		-			-			2,947

Equity securities trading		23		80		-		-			-			103
Mortgage and other loans receivable		-		122		1		-			-			123
Other invested assets^(c)		7,747		1,619		7,049		-			-			16,415
Derivative assets:
Interest rate contracts		12		6,649		1,006		-			-			7,667
Foreign exchange contracts		-		53		-		-			-			53
Equity contracts		106		117		38		-			-			261
Commodity contracts		-		181		2		-			-			183
Credit contracts		-		-		64		-			-			64
Other contracts		-		164		68		-			-			232
Counterparty netting and cash collateral		-		-		-		(3,716	)		(991	)		(4,707	)

Total derivative assets		118		7,164		1,178		(3,716	)		(991	)		3,753

Short-term investments^(d)		371		6,988		-		-			-			7,359
Separate account assets		51,412		2,853		-		-			-			54,265
Other assets		-		700		-		-			-			700

Total	$	64,004	$	273,959	$	46,342	$	(3,716	)	$	(991	)	$	379,598

Liabilities:
Policyholder contract deposits	$	-	$	-	$	1,188	$	-		$	-		$	1,188
Derivative liabilities:
Interest rate contracts		-		6,663		245		-			-			6,908
Foreign exchange contracts		-		171		-		-			-			171
Equity contracts		2		234		10		-			-			246
Commodity contracts		-		185		-		-			-			185
Credit contracts^(e)		-		5		2,651		-			-			2,656
Other contracts		-		65		222		-			-			287
Counterparty netting and cash collateral		-		-		-		(3,716	)		(2,599	)		(6,315	)

Total derivative liabilities		2		7,323		3,128		(3,716	)		(2,599	)		4,138

Other long-term debt^(f)		-		8,997		407		-			-			9,404
Other liabilities^(g)		24		1,564		-		-			-			1,588

Total	$	26	$	17,884	$	4,723	$	(3,716	)	$	(2,599	)	$	16,318

AIG 2012 Form 10-Q 19

Table of Contents

American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

December 31, 2011 (in millions)	Level 1		Level 2		Level 3		Counterparty Netting^(a)			Cash Collateral^(b)			Total



Assets:
Bonds available for sale:
U.S. government and government sponsored entities	$	174	$	5,904	$	-	$	-		$	-		$	6,078
Obligations of states, municipalities and political subdivisions		-		36,538		960		-			-			37,498
Non-U.S. governments		259		25,467		9		-			-			25,735
Corporate debt		-		142,883		1,935		-			-			144,818
RMBS		-		23,727		10,877		-			-			34,604
CMBS		-		3,991		3,955		-			-			7,946
CDO/ABS		-		3,082		4,220		-			-			7,302

Total bonds available for sale		433		241,592		21,956		-			-			263,981

Bond trading securities:
U.S. government and government sponsored entities		100		7,404		-		-			-			7,504
Obligations of states, municipalities and political subdivisions		-		257		-		-			-			257
Non-U.S. governments		-		35		-		-			-			35
Corporate debt		-		809		7		-			-			816
RMBS		-		1,345		303		-			-			1,648
CMBS		-		1,283		554		-			-			1,837
CDO/ABS		-		3,835		8,432		-			-			12,267

Total bond trading securities		100		14,968		9,296		-			-			24,364

Equity securities available for sale:
Common stock		3,294		70		57		-			-			3,421
Preferred stock		-		44		99		-			-			143
Mutual funds		55		5		-		-			-			60

Total equity securities available for sale		3,349		119		156		-			-			3,624

Equity securities trading		43		82		-		-			-			125
Mortgage and other loans receivable		-		106		1		-			-			107
Other invested assets^(c)		12,549		1,709		6,618		-			-			20,876
Derivative assets:
Interest rate contracts		2		7,251		1,033		-			-			8,286
Foreign exchange contracts		-		143		2		-			-			145
Equity contracts		92		133		38		-			-			263
Commodity contracts		-		134		2		-			-			136
Credit contracts		-		-		89		-			-			89
Other contracts		29		462		250		-			-			741
Counterparty netting and cash collateral		-		-		-		(3,660	)		(1,501	)		(5,161	)

Total derivative assets		123		8,123		1,414		(3,660	)		(1,501	)		4,499

Short-term investments^(d)		2,309		3,604		-		-			-			5,913
Separate account assets		48,502		2,886		-		-			-			51,388

Total	$	67,408	$	273,189	$	39,441	$	(3,660	)	$	(1,501	)	$	374,877

20 AIG 2012 Form 10-Q

Table of Contents

American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

December 31, 2011 (in millions)	Level 1		Level 2		Level 3		Counterparty Netting^(a)			Cash Collateral^(b)			Total



Liabilities:
Policyholder contract deposits	$	-	$	-	$	918	$	-		$	-		$	918
Derivative liabilities:
Interest rate contracts		-		6,661		248		-			-			6,909
Foreign exchange contracts		-		178		-		-			-			178
Equity contracts		-		198		10		-			-			208
Commodity contracts		-		146		-		-			-			146
Credit contracts^(e)		-		4		3,362		-			-			3,366
Other contracts		-		155		217		-			-			372
Counterparty netting and cash collateral		-		-		-		(3,660	)		(2,786	)		(6,446	)

Total derivative liabilities		-		7,342		3,837		(3,660	)		(2,786	)		4,733

Other long-term debt^(f)		-		10,258		508		-			-			10,766
Other liabilities^(g)		193		714		-		-			-			907

Total	$	193	$	18,314	$	5,263	$	(3,660	)	$	(2,786	)	$	17,324

(a): Represents netting of derivative exposures covered by a qualifying master netting agreement.
(b): Represents cash collateral posted and received. Securities collateral posted for derivative transactions that is reflected in Fixed maturity securities in the Consolidated Balance Sheet, and collateral received, not reflected in the Consolidated Balance Sheet, were $1.6 billion and $115 million, respectively, at June 30, 2012 and $1.8 billion and $100 million, respectively, at December 31, 2011.
(c): Included in Level 1 are $7.7 billion and $12.4 billion at June 30, 2012 and December 31, 2011, respectively, of AIA ordinary shares publicly traded on the Hong Kong Stock Exchange. Approximately 3 percent of the fair value of the assets recorded as Level 3 relate to various private equity, real estate, hedge fund and fund-of-funds investments that are consolidated by AIG at both June 30, 2012 and December 31, 2011, respectively. AIG's ownership in these funds represented 64.2 percent, or $0.9 billion, of Level 3 assets at June 30, 2012 and 57.3 percent, or $0.7 billion, of Level 3 assets at December 31, 2011.
(d): Included in Level 2 is the fair value of securities purchased under agreements to resell of $0.7 billion and $0.1 billion at June 30, 2012 and December 31, 2011, respectively.
(e): Included in Level 3 is the fair value derivative liability of $2.5 billion and $3.2 billion at June 30, 2012 and December 31, 2011, respectively, on the super senior credit default swap portfolio.
(f): Includes Guaranteed Investment Agreements (GIAs), notes, bonds, loans and mortgages payable.
(g): Included in Level 2 is the fair value of securities sold under agreements to repurchase and securities and spot commodities sold but not yet purchased, of $1.5 billion and $45 million, respectively, at June 30, 2012. Included in Level 2 is the fair value of securities sold under agreements to repurchase, securities and spot commodities sold but not yet purchased and trust deposits and deposits due to banks and other depositors, of $0.6 billion, $144 million and $6 million, respectively, at December 31, 2011.

TRANSFERS OF LEVEL 1 AND LEVEL 2 ASSETS AND LIABILITIES

AIG's policy is to record transfers of assets and liabilities between Level 1 and Level 2 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. Assets are transferred out of Level 1 when they are no longer transacted with sufficient frequency and volume in an active market. Conversely, assets are transferred from Level 2 to Level 1 when transaction volume and frequency are indicative of an active market. During the three- and six-month periods ended June 30, 2012, AIG transferred $136 million of securities issued by Non-U.S. government entities from Level 1 to Level 2, as they are no longer considered actively traded. AIG had no material transfers from Level 2 to Level 1 during the three- and six-month periods ended June 30, 2012.

AIG 2012 Form 10-Q 21

Table of Contents

American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

CHANGES IN LEVEL 3 RECURRING FAIR VALUE MEASUREMENTS

The following tables present changes during the three-and six-month periods ended June 30, 2012 and 2011 in Level 3 assets and liabilities measured at fair value on a recurring basis, and the realized and unrealized gains (losses) related to the Level 3 assets and liabilities that remained in the Consolidated Balance Sheet at June 30, 2012 and 2011:

(in millions)	Fair value Beginning of Period^(a)			Net Realized and Unrealized Gains (Losses) Included in Income			Accumulated Other Comprehensive Income (Loss)			Purchases, Sales, Issues and Settlements, Net			Gross Transfers in			Gross Transfers out			Fair value End of Period			Changes in Unrealized Gains (Losses) Included in Income on Instruments Held at End of Period



Three Months Ended June 30, 2012
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	1,054		$	31		$	(5	)	$	(63	)	$	45		$	(49	)	$	1,013		$	-
Non-U.S. governments		15			-			(7	)		-			5			-			13			-
Corporate debt		1,323			(1	)		(7	)		5			55			(69	)		1,306			-
RMBS		13,240			195			10			(616	)		7			(2,348	)		10,488			-
CMBS		4,173			2			14			492			12			(50	)		4,643			-
CDO/ABS		4,882			26			89			(91	)		168			-			5,074			-

Total bonds available for sale		24,687			253			94			(273	)		292			(2,516	)		22,537			-

Bond trading securities:
Corporate debt		5			-			-			(2	)		-			-			3			-
RMBS		314			(5	)		-			(19	)		-			-			290			(7	)
CMBS		433			16			-			13			4			(9	)		457			78
CDO/ABS		8,416			1,444			-			4,787			-			-			14,647			1,462

Total bond trading securities		9,168			1,455			-			4,779			4			(9	)		15,397			1,533

Equity securities available for sale:
Common stock		50			9			-			(19	)		1			-			41			-
Preferred stock		106			-			(31	)		61			3			-			139			-

Total equity securities available for sale		156			9			(31	)		42			4			-			180			-

Mortgage and other loans receivable		1			-			-			-			-			-			1			-
Other invested assets		7,186			(32	)		66			(68	)		18			(121	)		7,049			-

Total	$	41,198		$	1,685		$	129		$	4,480		$	318		$	(2,646	)	$	45,164		$	1,533

Liabilities:
Policyholder contract deposits	$	(782	)	$	(408	)	$	-		$	2		$	-		$	-		$	(1,188	)	$	244
Derivative liabilities, net:
Interest rate contracts		778			46			-			(63	)		-			-			761			10
Foreign exchange contracts		-			-			-			-			-			-			-			-
Equity contracts		40			(23	)		-			11			-			-			28			-
Commodity contracts		2			-			-			(2	)		-			2			2			(1	)
Credit contracts		(2,705	)		344			-			(226	)		-			-			(2,587	)		(122	)
Other contracts		(37	)		422			(7	)		(490	)		(42	)		-			(154	)		(15	)

Total derivative liabilities, net		(1,922	)		789			(7	)		(770	)		(42	)		2			(1,950	)		(128	)

Other long-term debt^(b)		(575	)		(268	)		-			22			-			414			(407	)		(25	)

Total	$	(3,279	)	$	113		$	(7	)	$	(746	)	$	(42	)	$	416		$	(3,545	)	$	91

22 AIG 2012 Form 10-Q

Table of Contents

American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in millions)	Fair value Beginning of Period^(a)			Net Realized and Unrealized Gains (Losses) Included in Income			Accumulated Other Comprehensive Income (Loss)			Purchases, Sales, Issues and Settlements, Net			Gross Transfers in			Gross Transfers out			Fair value End of Period			Changes in Unrealized Gains (Losses) Included in Income on Instruments Held at End of Period



Six Months Ended June 30, 2012
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	960		$	32		$	11		$	37		$	45		$	(72	)	$	1,013		$	-
Non-U.S. governments		9			-			1			(2	)		5			-			13			-
Corporate debt		1,935			(17	)		69			2			346			(1,029	)		1,306			-
RMBS		10,877			125			803			710			355			(2,382	)		10,488			-
CMBS		3,955			(67	)		301			503			43			(92	)		4,643			-
CDO/ABS		4,220			40			266			(21	)		606			(37	)		5,074			-

Total bonds available for sale		21,956			113			1,451			1,229			1,400			(3,612	)		22,537			-

Bond trading securities:
Corporate debt		7			-			-			(4	)		-			-			3			-
RMBS		303			28			-			(38	)		-			(3	)		290			18
CMBS		554			49			-			(122	)		36			(60	)		457			83
CDO/ABS		8,432			3,065			-			3,150			-			-			14,647			2,816

Total bond trading securities		9,296			3,142			-			2,986			36			(63	)		15,397			2,917

Equity securities available for sale:
Common stock		57			23			(12	)		(33	)		6			-			41			-
Preferred stock		99			2			(23	)		69			3			(11	)		139			-

Total equity securities available for sale		156			25			(35	)		36			9			(11	)		180			-

Mortgage and other loans receivable		1			-			-			-			-			-			1			-
Other invested assets		6,618			(179	)		276			33			760			(459	)		7,049			-

Total	$	38,027		$	3,101		$	1,692		$	4,284		$	2,205		$	(4,145	)	$	45,164		$	2,917

Liabilities:
Policyholder contract deposits	$	(918	)	$	(269	)	$	-		$	(1	)	$	-		$	-		$	(1,188	)	$	101
Derivative liabilities, net:
Interest rate contracts		785			46			-			(70	)		-			-			761			(38	)
Foreign exchange contracts		2			-			-			(2	)		-			-			-			-
Equity contracts		28			(11	)		-			13			(2	)		-			28			-
Commodity contracts		2			-			-			(2	)		-			2			2			(3	)
Credit contracts		(3,273	)		201			-			485			-			-			(2,587	)		(642	)
Other contracts		33			12			2			(78	)		(123	)		-			(154	)		24

Total derivative liabilities, net		(2,423	)		248			2			346			(125	)		2			(1,950	)		(659	)

Other long-term debt^(b)		(508	)		(378	)		(77	)		136			-			420			(407	)		54

Total	$	(3,849	)	$	(399	)	$	(75	)	$	481		$	(125	)	$	422		$	(3,545	)	$	(504	)

AIG 2012 Form 10-Q 23

Table of Contents

American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in millions)	Fair value Beginning of Period^(a)			Net Realized and Unrealized Gains (Losses) Included in Income			Accumulated Other Comprehensive Income (Loss)			Purchases, Sales, Issues and Settlements, Net			Gross Transfers In			Gross Transfers Out			Fair value End of Period			Changes in Unrealized Gains (Losses) Included in Income on Instruments Held at End of Period



Three Months Ended June 30, 2011
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	702		$	(1	)	$	23		$	62		$	17		$	(3	)	$	800		$	-
Non-U.S. governments		5			-			-			-			-			-			5			-
Corporate debt		1,235			-			15			305			307			(18	)		1,844			-
RMBS		6,868			79			(165	)		3,905			11			(6	)		10,692			-
CMBS		4,316			(7	)		(109	)		-			28			-			4,228			-
CDO/ABS		3,857			12			74			(382	)		374			(10	)		3,925			-

Total bonds available for sale		16,983			83			(162	)		3,890			737			(37	)		21,494			-

Bond trading securities:
Corporate debt		18			-			-			(9	)		-			-			9			-
RMBS		99			(2	)		(7	)		80			-			-			170			(7	)
CMBS		523			28			3			(18	)		80			(133	)		483			34
CDO/ABS		10,461			(877	)		4			(85	)		-			-			9,503			(881	)

Total bond trading securities		11,101			(851	)		-			(32	)		80			(133	)		10,165			(854	)

Equity securities available for sale:
Common stock		63			3			6			(12	)		2			(3	)		59			-
Preferred stock		63			(1	)		1			(1	)		2			-			64			-

Total equity securities available for sale		126			2			7			(13	)		4			(3	)		123			-

Equity securities trading		1			1			-			(1	)		-			-			1			1
Other invested assets		7,070			(17	)		126			(161	)		45			(18	)		7,045			-

Total	$	35,281		$	(782	)	$	(29	)	$	3,683		$	866		$	(191	)	$	38,828		$	(853	)

Liabilities:
Policyholder contract deposits	$	(369	)	$	(33	)	$	-		$	(4	)	$	-		$	-		$	(406	)	$	46
Derivative liabilities, net:
Interest rate contracts		619			138			-			(3	)		-			-			754			(14	)
Foreign exchange contracts		16			(12	)		-			-			-			-			4			1
Equity contracts		34			-			-			-			(7	)		7			34			(1	)
Commodity contracts		15			(1	)		-			(9	)		-			-			5			-
Credit contracts		(3,420	)		94			-			(6	)		-			-			(3,332	)		429
Other contracts		(6	)		(27	)		(51	)		(10	)		32			(7	)		(69	)		(114	)

Total derivatives liabilities, net		(2,742	)		192			(51	)		(28	)		25			-			(2,604	)		301

Other long-term debt^(b)		(996	)		(157	)		-			195			-			-			(958	)		(171	)

Total	$	(4,107	)	$	2		$	(51	)	$	163		$	25		$	-		$	(3,968	)	$	176

24 AIG 2012 Form 10-Q

Table of Contents

American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in millions)	Fair value Beginning of Period^(a)			Net Realized and Unrealized Gains (Losses) Included in Income			Accumulated Other Comprehensive Income (Loss)			Purchases, Sales, Issues and Settlements, Net			Gross Transfers In			Gross Transfers Out			Fair value End of Period			Changes in Unrealized Gains (Losses) Included in Income on Instruments Held at End of Period



Six Months Ended June 30, 2011
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	609		$	(1	)	$	27		$	174		$	17		$	(26	)	$	800		$	-
Non-U.S. governments		5			-			-			-			-			-			5			-
Corporate debt		2,262			(3	)		22			272			533			(1,242	)		1,844			-
RMBS		6,367			(2	)		368			3,943			22			(6	)		10,692			-
CMBS		3,604			(34	)		555			72			53			(22	)		4,228			-
CDO/ABS		4,241			32			312			(837	)		446			(269	)		3,925			-

Total bonds available for sale		17,088			(8	)		1,284			3,624			1,071			(1,565	)		21,494			-

Bond trading securities:
Corporate debt		-			-			-			(9	)		18			-			9			-
RMBS		91			-			(7	)		86			-			-			170			(3	)
CMBS		506			66			3			(76	)		161			(177	)		483			68
CDO/ABS		9,431			153			9			(90	)		-			-			9,503			146

Total bond trading securities		10,028			219			5			(89	)		179			(177	)		10,165			211

Equity securities available for sale:
Common stock		61			18			4			(27	)		8			(5	)		59			-
Preferred stock		64			(3	)		1			-			2			-			64			-

Total equity securities available for sale		125			15			5			(27	)		10			(5	)		123			-

Equity securities trading		1			1			-			(1	)		-			-			1			1
Other invested assets		7,414			36			469			(511	)		45			(408	)		7,045			-

Total	$	34,656		$	263		$	1,763		$	2,996		$	1,305		$	(2,155	)	$	38,828		$	212

Liabilities:
Policyholder contract deposits	$	(445	)	$	46		$	-		$	(7	)	$	-		$	-		$	(406	)	$	(63	)
Derivative liabilities, net:
Interest rate contracts		732			22			-			-			-			-			754			(54	)
Foreign exchange contracts		16			(12	)		-			-			-			-			4			1
Equity contracts		22			(7	)		-			38			(7	)		(12	)		34			(7	)
Commodity contracts		23			2			-			(20	)		-			-			5			-
Credit contracts		(3,798	)		476			-			(10	)		-			-			(3,332	)		473
Other contracts		(112	)		(23	)		(26	)		40			32			20			(69	)		(66	)

Total derivatives liabilities, net		(3,117	)		458			(26	)		48			25			8			(2,604	)		347

Other long-term debt^(b)		(982	)		(211	)		-			256			(21	)		-			(958	)		(198	)

Total	$	(4,544	)	$	293		$	(26	)	$	297		$	4		$	8		$	(3,968	)	$	86

(a): Total Level 3 derivative exposures have been netted in these tables for presentation purposes only.
(b): Includes GIAs, notes, bonds, loans and mortgages payable.

AIG 2012 Form 10-Q 25

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Net realized and unrealized gains and losses related to Level 3 items shown above are reported in the Consolidated Statement of Operations as follows:

(in millions)	Net Investment Income			Net Realized Capital Gains (Losses)			Other Income			Total



Three Months Ended June 30, 2012
Bonds available for sale	$	234		$	(9	)	$	28		$	253
Bond trading securities		1,290			-			165			1,455
Equity securities		-			9			-			9
Other invested assets		5			(41	)		4			(32	)
Policyholder contract deposits		-			(408	)		-			(408	)
Derivative liabilities, net		-			72			717			789
Other long-term debt		-			-			(268	)		(268	)

Three Months Ended June 30, 2011
Bonds available for sale	$	159		$	(80	)	$	4		$	83
Bond trading securities		(496	)		-			(355	)		(851	)
Equity securities		1			2			-			3
Other invested assets		(2	)		(37	)		22			(17	)
Policyholder contract deposits		-			(33	)		-			(33	)
Derivative liabilities, net		1			(90	)		281			192
Other long-term debt		-			-			(157	)		(157	)

Six Months Ended June 30, 2012
Bonds available for sale	$	465		$	(384	)	$	32		$	113
Bond trading securities		2,839			-			303			3,142
Equity securities		-			25			-			25
Other invested assets		(9	)		(173	)		3			(179	)
Policyholder contract deposits		-			(269	)		-			(269	)
Derivative liabilities, net		(1	)		61			188			248
Other long-term debt		-			-			(378	)		(378	)

Six Months Ended June 30, 2011
Bonds available for sale	$	240		$	(256	)	$	8		$	(8	)
Bond trading securities		505			-			(286	)		219
Equity securities		1			15			-			16
Other invested assets		44			(52	)		44			36
Policyholder contract deposits		-			46			-			46
Derivative liabilities, net		1			(145	)		602			458
Other long-term debt		-			-			(211	)		(211	)

26 AIG 2012 Form 10-Q

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American International Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The following tables present the gross components of purchases, sales, issues and settlements, net, shown above:

(in millions)	Purchases		Sales			Settlements			Purchases, Sales, Issues and Settlements, Net^(a)



Three Months Ended June 30, 2012
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions	$	97	$	(158	)	$	(2	)	$	(63	)
Non-U.S. governments		1		(1	)		-			-
Corporate debt		80		(52	)		(23	)		5
RMBS		198		(268	)		(546	)		(616	)
CMBS		596		(69	)		(35	)		492
CDO/ABS		203		-			(294	)		(91	)

Total bonds available for sale		1,175		(548	)		(900	)		(273	)